This book has been an exceptional case study and exploration of the competitive advantage of fast fashion - on the surface it seems easy to replicate but the foundations of these businesses are complex with large barriers to success.
"The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by" - Jose Maria Inditex CEO since 1997.
History of Zara
Founded by Amancio Ortega (Ortega) in 1963 who is still the largest shareholder of the business now called Inditex. Ortega started the business as 'Confecciones GOA' in Arteixo-La Coruna (a region of northwestern Spain) to manufacture womens pyjamas and lingerie. In 1975 a large customer cancelled an order then Ortega started selling clothes from a small outlet for cancelled orders from his factory (which he called Zara). Over time he came to believe that manufacturing and retailing needed to be closely linked where customer demand is very difficult to forecast. Ortega then focused on building a vertically integrated structure where design, production, distribution and retailing are fully integrated together. This has guided the business ever since.
Zara had 6 stores in 1979 in Spain focusing on establishing retail operations in major Spanish cities during the 1980s. In 1988 Zara opened their first store outside of Spain in Portugal, followed by New York in 1989 and Paris in 1990. From 1990 to 2000 Zara entered 29 more countries in Europe, America and Asia. Today it has close to 2,200 stores globally.
Zaras philosophy for fashion is: "...Creativity and quality design together with a rapid response to market demands..." Inditex owns more than 100 companies engaged all in several activities related to textiles such as purchasing, manufacturing and logistics.
Zara targets young, fashion conscious city dwellers – women, men and youth 0-45 yrs old. Their clothing tastes change rapidly and fashion misses are common even with extensive advertising and new styles can appear suddenly (eg a film star wearing something at an awards show), surge then fade quickly. Zara’s focus is on producing and delivering this style when they are still hot and not relying on the persuasiveness of advertising to push their older stock.
Customers are aware of the rapid movement of stock through Zara stores and of the fact that some products will not reappear once sold out, this creates scarcity and creates an incentive to buy. New stock arrives twice a week so the stores are always refreshed with new lines. This encourages repeat store visits. The average store is visited 4 times annually but Zara customers visit its stores on average 17 times annually – this circumvents the need for advertising.
Zara only spends 0.3% of sales turnover on advertising vs 4% of its competitors.
Store locations are always prime retail districts with strong foot traffic, the stores have large window displays and merchandising displays new lines to attract customers. Average store size of Zara is 1,200 square meters and most of the store is kept empty to invite browsing and further enhance the feeling of scarcity, these footprints are completely changed every 4-5yrs. A central store is kept at La Coruna which tests new designs before rolling out worldwide. All stores are uniform in layout, lighting, fixtures, window displays and arrangement of products worldwide.
Individual stores do not set prices, they are done centrally for the Spanish market and then set at a fixed % of this baseline, taking into account distribution costs and other market conditions. For example the UK is 51% higher than Spain and the USA is 109% higher than Spain.
Competitor - Hennes and Mauritz - H&M
Founded by Hennes in Sweden in 1947. H&M have moved their production to lower cost areas and today 60% of production takes place in Asia. H&M has around 900 suppliers but no factories, these third party suppliers ship their product to DCs which sort and redistribute to stores, these DCs are the backbone of H&Ms global operations.
H&M manages to achieve a lead time of 20 days with a price that is 30%-50% cheaper than Zara. H&M currently has 5,000 stores worldwide. The average H&M store footprint is 1850sqm. H&M describes their clothes as items that can be worn ten times on average.
Zara’s Competitive Advantage
Demand chain strategy – customer is at the start of the supply chain not the end.
*Shorter Lead Time = More lines on fashion
*Lower quantities per style = Scarce supply
*More styles per year = More chance of items being on trend.
This group of advantages creates a differentiation and difficulty of replication. Zara can identify a trend and get clothes into store in 14 days.
Offering trending items allows for full sell through of inventory which results in a higher net sales prices (lower discounts). By limiting the quantity of manufactured items Zara reduces its exposure to any product and creates artificial scarcity, this makes an item less available and more desirable. Zara discounts on average 18% of its product approximately half the industry average. Instead of producing more quantities Zara focus on producing more styles.
By having a demand chain strategy Zara reduces the bullwhip effect of demand exaggerating production to the point of over supply, the bullwhip effect produces compounded damage through excess inventory, discounting, brand damage, stock write off and poor customer perception.
Design inspirations come from trade shows, influencer networks, magazines etc. An interesting point of inclusion is the store network feedback incorporating customer feedback into the design decisions. New designs are released continuously with no single line on the market for more than 2 weeks. As Ortega says “No one likes to dress like everybody. It is important to have fresh fashion”.
Zara produces 40,000 new designs annually from which 11,000 are selected this compares to the industry average of around 2,000 – 4,000.
Zara designers are encouraged to experiment but focus on mass market, Zara are only following innovators they are no being one. Zara aims to catch the early majority product and cease production at mainstream.
50% of Zara’s products are manufactured in house by its 23 company owned factories, the labour intensive steps are subcontracted through over 500 workshops. The other 50% of products are procured via 400 outside suppliers. 80% of production is completed In Europe. The famed 14 day lead time is only for goods that have all items in stock. Zara is able to stop of increase production of a line very quickly.
All products pass through the 5 story 500,000 Sqm major DC in La Coruna. This DC can sort more than 60,000 items every hour and is located between all 23 manufacturing facilities and is connected by Zara owned 211km rail network. Zara deals with some 300,000 new SKUS every year (11,000 new lines x 6 colours x 7 sizes).
Items are packed into separate boxes and racks and ready for shipment in 8hrs. in 2004 the major DC shipped 130M pieces (40,000 per day). Speed is the key to execution, Distance is measured in time not kms and has a 98.9% DIFOT.
Inventory and Retailing
No Zara stores have a back room for excess inventory, there is no inventory anywhere in the supply chain. The stores place two orders a week Wednesdays before 3pm and Saturday before 6pm, if the store misses an order the Head Office issue a replenishment order based on last order volume. The store managers take control of their ordering and therefore flexes to regional sales patterns etc.
Stores are required to take a pre-season commitment of only 20% and in season commitment of 45% this is almost the reverse for traditional retailers. Zara manages to collect 85% of its full price vs around 65% for the industry.
Stores relay sales data back to HQ that collects all data and therefore keeps a real time inventory ledger but also allows HQ to see patterns and trends in selling volumes to react in season. It also allows the ability to shift inventory from non-selling stores to high selling stores to further maximize sell through.